HMOs increasingly popular in lettings market despite complexity

The latest lettings market snapshot by mortgage lender Paragon has found that of the landlords planning to purchase property in the next 12 months, nearly a third want an HMO. 

This is up from just one in eight landlords three months ago.

This is the highest level since Q2 2017 and reflects a greater propensity for portfolio landlords to purchase, says Paragon. 

A quarter of landlords said they plan to acquire flats, with 18 per cent targeting terraced housing.

The research revealed that one in 10 portfolio landlords – those with four or more properties – plan to add to their portfolio over the next quarter, compared to just one per cent of non-portfolio landlords.

HMOs are typically purchased by portfolio landlords as they offer a higher yield but are more complex to manage. Paragon research shows HMOs achieve a yield of 6.5 per cent compared to an average yield across all property types of 5.6 per cent.

Richard Rowntree, director of mortgages at Paragon, says: “The private rented sector needs to grow to meet increasing levels of tenant demand and it’s clear that portfolio landlords will drive that growth. Not only are they looking to build their portfolios, they are also looking at more complex types of property that will deliver higher yields, such as HMOs.”

Overall, landlord confidence generally remained weak during the final quarter of 2019 although there was a slight uptick in landlords’ confidence compared to Q3 2019. 

Paragon’s Confidence Index – which is produced by landlords ranking confidence out of 10 – recorded a score of 6.2 during the period, the highest level for a year and up from 5.8 on the previous quarter.

Rowntree adds: “Although still fragile, hopefully we are starting to see some green shoots with regards to landlord confidence. Landlords have encountered significant regulatory and fiscal changes in recent years and we hope to now enter a more settled period.”